Long-forgotten SGI could be a steal

Real estate, employees and NUMA are hidden assets

MikeTarsala

SAN FRANCISCO (CBS.MW) -- One-time Silicon Valley starlet Silicon Graphics has fallen so far from grace that investors, fund managers and even its competitors have completely written it off.

Why else would everyone pass at the chance to own a 6,800-employee company which technology analysts call second-to-none for not much more than the value of the land on which it sits?

There's a list of reasons for passing on Silicon Graphics
SGI, -3.50%
The company's shares have been on a five-year skid. The company suffered through years of cost-cutting and restructuring. Also, it's consistently lost market share to Sun Microsystems
SUNW, +21.74%
IBM
IBM, -0.08%
and Hewlett-Packard
HWP

At some point, however, the company has to hit bottom, or sell out to a rival. According to the few analysts who still track the stock, key metrics are showing that Silicon Graphics, or SGI as the company prefers to be called, is undervalued. At this point, analysts say the stock isn't likely to go much lower.

At the current price, they claim it's a steal not only for Wall Street, as well as for any hardware or software companies that might be looking for an acquisition.

"With a market cap of about $700 million, they have assets that could go for many more times that," said Richard Chu, analyst with SG Cowen Securities.

Its real estate could be worth $400 to $500 million

Of particular note is the value of SGI's real estate. The company owns land - most of which are in the heart of pricey Silicon Valley - worth about $400 million, according to Hal Covert, SGI's chief financial officer.

Analyst Chu, however, pegs the real estate assets at closer to $500 million. The hidden real estate asset is one of the main reasons he says the company's shares could be poised for a breakout. Right now, SGI shares sit near a 52-week low, at less than $4 a share.

If it's true that SGI sits on land worth anywhere near $500 million, is there $200 million-worth of assets left in the company to make it and its shares valuable?

SGI's investments shouldn't be overlooked. The company owns about $100 million of stock in both private and public companies.

The company's core business, while not healthy, is an asset. SGI's revenue run rate is about $2.3 billion. Management says the company's high-end computer hardware should deliver margins of 40 percent long-term, putting it in the ballpark with industry leaders. Also, the long-struggling company is optimistic that it can be back in the black by the end of the year.

Helping the company is that it recently spun off its money-losing Cray supercomputer business. It's also ditched its Mips chip business.

Investors who have suffered through SGI's dark days may be skeptical of any of management's claims to again turn consistent profit. Indeed, the company could be challenged to hit fourth quarter financial targets, one analyst said.

Watch out for NUMA

But even if it misses the numbers, SGI still makes a value case.

It should be noted that SGI's software subsidiary, Alias Wavefront, generates about $100 million in revenue a year. It could generate more healthy cash, should the company ever choose to sell it (which isn't in the plan). What's more, SGI owns an undisclosed stake in privately held technology company called WanNet.

SGI's high-end NUMA computer technology, which takes advantage of shared memory among many processors, could someday prove to be a much larger asset. Some analysts say that servers may some day need to use NUMA technology to continue to "scale", or keep up with the rate of computing speed advances. SGI is one of the leaders in NUMA.

It also could be an asset competitors might consider picking up. Almost a year ago to the day, IBM acquired Sequent Computer, in part to hedge its bets should NUMA technology become widespread.

"Most companies that can afford to try more than one approach are going in that direction," said Laura Conigliaro, analyst with Goldman Sachs in New York. "It's simply hard to scale at a certain point."

And what of SGI's employees? To be sure, there's value in the company's tech-savvy workforce, should the company ever sell out. Even placing a cut-rate value on SGI's employees - say, $100,000 a head - places their collective worth at $680 million.

SGI's Covert doesn't think the company will need to liquidate. He insists that the company can climb back to prominence without outside help. He thinks SGI can achieve between a 5 percent and 10 percent sustainable operating profit run rate.

The value of SGI's land, by the way, isn't lost on Covert. He says SGI will soon use it to its advantage. The company will unveil plans to convert most of that land to cash. The company is putting two Silicon Valley buildings it no longer needs up for sale, so it can generate an estimated $125 million to $150 million.

Also, the company is looking to sell, then lease back its main campus, making another $225 million to $250 million.

Should SGI turn its non-operating assets to cash, Covert says the company could gain $200 million to $250 million on any given quarter's income statement.

Analysts are hoping that Covert and the rest of SGI's management can execute on the continuing turnaround plan. But even if SGI falters, the company could find corporate suitors that are willing to give the company more than $700 million.

"Right now, we believe we can get the best value for shareholders by being independent," Covert said. "But if someone comes through with a tender offer, we can't prevent it."

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